Goldman's private equity investments paid off

NEW YORK (Reuters) - Goldman Sachs generated more than one-fifth of its third-quarter earnings from private equity and real estate investments, a mostly overlooked fact as investors focused on the bank's trading profit.

Private equity investments have long helped banks generate big profits, but in the future banks won't be able to rely on them: a new law severely curtails the ability of banks to invest their own money in areas like leveraged buyouts.

Goldman's (GS.N) reliance on private equity shows just how hard it will be for the bank to boost profits in the future.

The bank posted $635 million of gains from corporate principal investments, which after taxes is about $425 million, or about 24 percent of the bank's $1.74 billion shareholder profit.

The bank's portfolio of principal investments grew during the quarter to $15.3 billion from $14 billion in the second quarter. It is unclear if Goldman added investments to the portfolio or if some holdings appreciated in value. A Goldman spokesman declined to comment.

But what's interesting is that the private equity portfolio is growing in a time when the company is working to comply with new U.S. regulations limiting how big banks use their own capital, analysts said

Under the so-called Volcker Rule, Goldman will be required to sell off some of the $15.3 billion portfolio in coming years.

"This is a reminder that Goldman has a massive merchant banking portfolio that they are going to have to liquidate," said Brad Hintz, an analyst with Sanford C Bernstein.

Hintz said he believes Goldman will be looking for exit opportunities once the mergers and acquisitions market picks up.

"Where the real gains are going to be shown is when Goldman liquidates that portfolio," Hintz said.

For now, the portfolio's performance was a boon to otherwise weak third-quarter earnings, which sagged in a difficult trading environment.

Goldman on Tuesday reported net income of $1.9 billion and a chunk of that came from its principal investments unit, which reported net revenue of $754 million, including gains of $635 million from corporate principal investments.